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Korea's trade deficit with Japan is usually offset by its surplus with China. And Japan and China have a similar relationship.

But this is about to change as China, the world's fourth largest economy, becomes caught up in the economic slowdown.

Korea has been watching its surplus decrease after hitting a record high of more than US$23.2 billion back in 2005. Korea supplies manufacturing tooling and parts to China, a good business to be in during that country's boom times but not so good when exports are depressed.

Even worse, Korea's trade deficit with Japan is projected to hit a record high $33 billion for 2008. That would put the figure past $200 billion over the last ten years.

Meanwhile, Japan's deficit with China has been shrinking.

A researcher with the Korea International Trade Association said, "As the global economic crisis shrinks China's exports, it's dealing a heavy blow to countries like Korea, which exports items for China to put together to sell in other advanced nations. Korea's products are low value-added items so they are easily replaced by other advanced ones."

Experts say the trend highlights the need for Korea to further foster small- and medium-sized companies with capabilities to develop parts that are more appealing in the Chinese market.

Arirang News